LOCAL REPORT Paul Stephenson, OATS Ltd

With a population of 1.44 billion people, is now also a key market for both domestic and China accounts for 18.5% of the world’s total imported finished products. population, including 66 cities with more than one Since becoming the People’s Republic of China in million inhabitants each. China has experienced 1949, the nation has become a global industrial unprecedented economic growth over the past 40 hub offering significant scale and low-cost labour. years, seeing an exponential rise in GDP starting As a result, foreign companies have turned to China around 2005 at $2.3tr to an IMF-forecast $15.5tr by as their main manufacturing base. Now China is the end of 2020. However, real growth has declined more often in the partnership driving seat with from its 14.2% peak in 2007, to a forecast 6.1% in global OEMs, particularly in the automotive sector, 2020 – although the COVID pandemic may have a benefitting from access to the Intellectual Property more significant short-term impact on that figure. these partnerships bring in terms of design and technology. The nation also faces challenges from increased life expectancy and thus an ageing population, The vehicle parc, manufacturing and sales combined with declining population growth and rising China’s vehicle industry can safely be described prosperity. As with overall GDP, per capita GDP has as “gargantuan”. In July 2020, according to the risen from $2,100 to an estimated $11,000 per head Chinese government’s latest figures based on local by the end of 2020. As a result, socio-economic and reports, China’s total vehicle parc was 360m vehicles, consumer aspirations have also increased. As well as accounting for around 20% of the world’s total being a voracious consumer of raw materials, China four-wheel plus vehicle parc. Nearly 70m motorcycles

Passenger car ownership in China by year of registration at December 2019. Total Parc=~221.4M

Source: OATS

LUBE MAGAZINE ONLINE DECEMBER 2020 and almost four and a half million “new energy” gas both at 8% each. China is attempting to cap vehicles are included in the total. According to official coal consumption at current levels due to pollution sources, 69 cities in China have more than one million concerns, however renewables only supply 5% of operating vehicles, with 12 cities claiming more than current energy consumption, meaning China will have three million vehicles and Beijing boasting more than to dramatically ramp-up investment in this area. six million. Energy exports are particularly lucrative for China. In The China Association of Automobile Manufacturers’ 2019, it was the largest petroleum and petrochemicals latest figures claim 4.36m vehicles were sold in the supplier in the world, with crude oil and gas coming first half of 2020 alone, with 85% of those being from legacy fields with production capacity of almost Chinese brands. These include the state-owned ‘Big five million b/d. China also has a large CTL capacity of Four’ of SIAC, Chang’an Automobile, Dongfeng and 108,000 b/d and about half a million b/d of methanol FAW, with independents such as Geely, BIAC, GAC production. New capacity from integrated refineries and Great Wall Motors all featuring strongly in a linked to petrochemical facilities is expected in highly competitive market. As individual prosperity has 2020/21, with more to follow. increased, so the age of the vehicle parc has reduced. Production is dominated by three main national Since 2009, annual vehicle production has exceeded companies: China Petroleum & Chemical Corporation the EU, USA and Japanese combined. In 2019, some (Sinopec), China National Petroleum Corporation 21.3m passenger cars and a further 4.3m commercial (CNPC) and China National Offshore Oil Corporation vehicles were built in China. Many of the domestic (CNOOC). Despite its massive export market, China producers have now forged JV alliances with Western remains a net importer of crude, predominantly from OEMs. In particular General Motors, as well the Middle East (44% ) followed by Russia and Africa. as the likes of FAW-VW, SAIC-VW, Volvo Cars (wholly owned by Geely since 2010) and SAIC-owned MG In 2018, the country consumed an estimated 14.5m Rover, to name just a few. In some cases, Chinese b/d of petroleum liquids – up nearly 4% from 2018. manufacturers have produced their own look-alike Diesel consumption usage accounted for 27% of versions of Western-designed cars, raising questions requirements, whilst gasoline was 24%. Consumption around copyright and IP. is forecast to decline slightly due to the fall in overall GDP growth, with further pressure coming China also has many major OEMs in the top 20 from China’s increasingly draconian environmental off-highway manufacturing list, such as , legislation and the rise in EVs. XCMG and Zoomlion, with many more in the top 50 worldwide KHL ‘Yellow’ list. These OEM’s have The lubricants market certainly made their presence felt, taking on the likes of Whilst China’s automotive engine technology has Caterpillar, Komatsu, John Deere, Volvo CE and Hitachi been previously satisfied by lower specifications by offering significantly lower initial purchase costs. such as API CD, and CF-4 type lubricating oils, the introduction of imported engine design, technology China has also set its sights on being the world leader and manufacture has been a key driver for a more in electric vehicle manufacturer for both passenger sophisticated, higher-specification market. This has and commercial vehicle markets, including the battery been further enhanced by the dramatic acceleration in and storage technology that powers and charges emissions regulations from China 1, first implemented them. Geely/Volvo-owned Polestar has recently nationwide in 2000, to five iterations of China 5 in launched its all-electric Polestar 2 SUV into Europe to just six years to 2018, with China 6a set for national critical acclaim. roll-out in 2021 and China 6b to follow just two years later – taking the regulations to parity and beyond Base oil production Euro 6 standards. China’s primary energy consumption remains coal dominated; coal supplying 58% of the country’s As a result of these developments, existing lubricants energy usage. Petroleum and other liquid energy fulfils specifications are being enhanced to meet the latest 20% of demand, with hydroelectricity and natural National Standard GB11122. At the same time, the

LUBE MAGAZINE ONLINE NOVEMBER 2020 Engine Oil Specification by Car Parc %

Source: OATS

newer vehicle parc is increasing demand for engines driven by a consortium of the five dominant vehicle needing low ash engine oil such as ACEA C Grades, manufacturers, lubricant and additive companies and API CJ-4, JASO DH-2 and DL-1. number of influential independents.

As the chart above demonstrates, high -performance In terms of product marketing, many vehicle owners synthetics are now prevalent – with SL and SM lubes in China have access to the internet and can order taking the majority share. OEM-specific products are the required fluids on-line. However, the passenger also in demand, with VW specs predominant in line car engine oil market remains predominantly ‘do it for with brand popularity. me’ rather than DIY. Mirroring the increased demand for higher grade products, the global trend towards As with other ‘developing’ nations in an automotive low and ultra-low viscosities is reflected in the Chinese sense, the significant improvement in engine and market. transmission performance requirements across the parc has led Chinese OEM’s and oil companies to Particularly since 2018, demand for the market- consider creating their own lubes specifications dominant heavy grade 5W-30 has fallen significantly, for the domestic auto industry. This is further with the 0W-20 and even 0W-16 now starting to emphasized in China by enhanced fuel characteristics influence consumer figures. The chart also shows relating to sulphur, aromatics, etc. In the heavy-duty a major increase in “others” which are mainly industry, the call for a China standard is being OEM-specific viscosities.

LUBE MAGAZINE ONLINE NOVEMBER 2020 Parc % by Year of Manufacture by significant Viscosities

Source: OATS

Summary with the nation’s challenging emissions regulations The sheer scale of China’s vehicle and lubricant and its stated aim of becoming the gobal leader in EV markets have already had a significant influence on technology, China is set to become a major influencer global sales strategies in recent years and will only in the future of the global lubricants industry. For become more influential as China’s prosperity grows those overseas producers looking to gain access to in relation to other global powers. the market, expect some tough questions being asked about finished products and competition from The fact there are now strong calls for a domestic fast-moving, imitative domestic developers. lubricants standard indicates the speed and maturity of the industry. Whilst this can be justified based on the sheer scale of domestic production volumes and vehicle parc, questions remain regarding the potential impact on consumer costs and vehicle exports, the latter coming with another new spec attached to those already set by API, ACEA or JASO.

More likely, as with Western OEMs, a compromise is the most realistic outcome, with Chinese automakers creating their own extra fluid tests and specifications to sit alongside the existing base ACEA or API specs.

While this may restrict independent or smaller national oil companies from being able to supply OEM-specific fluids - and potentially prevent non-OEM dealer- approved centres from undertaking warranty service - the scale of the overall parc is almost certainly large enough to keep both OEMs and independents in business.

As has been highlighted in other OATS’ Country Reports, the drive for lower emissions, improved fuel economy and growth in alternative powered vehicles are likely to be the strongest influences on global lubricants markets. China is no exception. In fact,

LUBE MAGAZINE ONLINE NOVEMBER 2020